Asymmetric outcome in a symmetric dynamic duopoly

Abstract

In a dynamic duopoly, will an initial asymmetry between firms increase or decrease over time? We examine this issue within a stochastic dynamic alternate-move duopoly model that explicitly accounts for action and reaction between firms. We consider two firms that are symmetric with regard to all primitives such as demand, cost and production functions, and which are subject to the same stochastic environment. The only asymmetry is with regard to their initial capital stocks which in turn asymmetrically influences their current and future profit and investment possibilities. We offer a characterization of the stochastic steady state and its supporting ergodic set for each firm. We are then able to identify the precise restrictions on the initial conditions under which the two firms either converge or diverge in the long run.